Buyside Viewpoint from a Fixed Income PM

Background

I'm fairly new to this website but have read some fantastic posts that get a lot closer to the reality of both the buy and sell-side than other resources I've seen. So, I figured I'd post my two cents as a starting point. This was mainly prompted by reading BlackHat's discussion on how he went about reading a 10-k. I thought the detail he provided was absolutely worthwhile for anyone trying to understand how to go about reading an annual report. Frankly there was a lot of insight there that surpassed some of the generic Level II CFA material. What I mean by that is that although the nuances of FCF and balance sheet reporting are essential to grasp, BlackHat covered a lot more of what I would generically describe as

critical thinking

I can't stress enough how important it is to take a step back and think about what you're doing, why you are doing the analysis you're doing, and how it will be used. This is critical, whether it is you that uses the research at some point in your career to take on an active weight, or whether you're trying to think through the lense of a PM and you are asked to do the background research, even if you don't have the ultimate buy/sell decision. With that said, I'd like to discuss how I ended up at a small investment manager (less than $10 billion AUM).

My introduction

First of all, one of my colleagues that introduced me when I spoke at his college a few years back started by reading his graduate financial math students my background (I am a CFA charterholder but don't have a masters degree for point of reference and I didn't work at a bulge bracket bank training program. My early career path was non-traditional, if there is such a thing as traditional anymore. I didn't attend an Ivy League university.). He said, " I want you guys to notice one thing first, and this is a huge thing to note before going into any more detail....you don't just roll out of bed and become a portfolio manager. You become an analyst somewhere doing something, even if it is not the exact thing you thought you'd be doing or the exact thing you thought you wanted. When you're lucky enough to get that job, you learn everything you possibly can about the capital markets, about your job, about the industry, about the economy, about what the different roles in the industry mean and how it all fits together. You take your job seriously and excel at it, even if it is really boring. Only then will you be lucky enough to hopefully be able to use some of your financial education in a role where it is useful to have that education. After paying your dues, down the road you might be able to do something that interests you, but probably not right away."

Always felt a step behind

His comments hit me like a truck; I'd always thought I was a step or two behind some friends in the industry that got into trading roles early-on. I always thought of starting in the industry doing quantitative modeling of pension and insurance asset/liability management and asset allocation boring and an obstacle to my true calling - being an equity PM deciding what stocks to buy and sell. Pensions were very 20th century in my mind and I really didn't know much about them except for the fact that only government workers and old people got income from them. When I got the quant analyst job in my early 20's at a large Asset Management firm, I thought it was a stepping stone - soon I'd be a big-time equity PM if I was committed enough and smart enough, I thought to myself. This quantitative modeling is one of the most boring things I've ever done, I also thought to myself. I understand financial statements and business models, and have a good economics degree from a top liberal arts school, I thought to myself. Man, I didn't go to Wharton or Harvard but so-and-so who played hockey at my high school is trading at xyz investment bank and he got into Harvard even though I had better grades! What the hell! These are a collection of my disgruntled thoughts at the time...I hate the use of text-message-language but this one really does make me laugh-out-loud when I look back at how stupid I was. What an opportunity I had and what an idiot I'd been! Luckily, though I didn't realize it at the time, I was able to make the most of my opportunity even though I could have been a bit more positive at the time.

There is no formula after your first job

He also was trying to communicate something that I found extremely difficult when I was in my early 20's - there generally aren't 50 asset managers out there knocking your door down with job offers out of the blue. Believe it or not, many people in the asset management industry aren't mind-readers, and may not be aware of you, even if you went to a great school with great grades. When you go to a good school and you got good grades your whole life, you're used to things working out, even if it took a lot of hard work. You didn't really have to uncover opportunities even if you did have to work very hard to create those opportunities. What I mean by this is that in high school, you might have had to work your butt off to get in the top 5% in your class but there was essentially a formula. Here is the curriculum, understand/memorize it, get A's in your AP classes - repeat. Study for the SATs and get into a good college. Major in finance or economics, and get good grades in those classes, and everything will just fall into place, especially if you were a good college athlete while getting good grades - won't that communicate competitiveness as well as ability? What could go wrong? Well for starters, playing a sport that requires massive amounts of summer participation prevents you from getting a financial internship for the most part (but that's just another excuse). The real problem is that you have to actually figure out how to find opportunities, and you'll fail a lot, and you probably won't be used to that. After college I wasn't able to get the job I wanted right away at any bank or any asset manager, and I also probably didn't really look hard enough, even though I thought I did at the time. So, I took the job I mentioned above and after a couple of years doing that, I became a research analyst covering asset allocation and asset-liability management. Suddenly my boring background was very useful, as I discussed tail risk hedging and liability hedging, portable alpha, and yield curves as they relate to asset allocation. I still thought I was at least as far away as I'd ever been from being an equity analyst or PM, but at least some buy-siders were finding my research useful and I wasn't hating my job anymore.

How I ended up PM

A couple of years later, a very senior guy at one of those buy-side firms who found my research useful asked me if I'd like to be an investment strategist on their fixed income desk. They wanted someone to look at the asset/liability portfolios risk, monitor that and research topics relating to that, and discuss what's going on (or going right or wrong) with those portfolios with our pension clients. Ugh, more pensions and ALM I thought but again, I still thought it was a great chance to take another step closer as I would be working closely with the PMs. So I took the job and did work closely the PMs. It turns out that my ALM background was very useful in identifying risks in the portfolios versus the liabilities we were managing to, and by this point I was pretty fluid in convexity and duration, and statistics. I also was about to pass my CFA. About a year later, I was promoted to PM after demonstrating I understood the drivers of risk and return in our portfolios. Years later, here I am today and I love what I do. But, if you asked me 10 years ago, I would have said that I really was not doing what I wanted to do, and I was at the periphery of finance at best. This post went on a lot longer than I intended but the moral of the story is that nothing will be given to you and that you have to learn how to get knocked down and get back up if you have any chance in the industry. You also have to make your own luck.

Comments (18)

Jan 17, 2014

Really liked your story. Thanks for sharing, trying to end up in the same position as you one day. Always feel like I'm far far away

Jan 18, 2014

Thanks zeroblued. I always felt far away until suddenly I wasn't. If you love the capital markets and are genuinely intrigued by the economy, business and valuation, you'll have a great career. It just takes a lot of effort in terms of constantly exploring how to take that next step. I also think too many people think too much about all of the irrelevant things in their early jobs rather than trying to learn how to translate a couple of skill sets early into future careers.

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Jan 17, 2014

drive4show, what are some examples of irrelevant things that people waste their time on? Also have the same mindset that I want to do equities, but fixed income world would be interesting to learn.

Yup, I have a passion for finance. Since I'm a non-target though, I'm doing the IB -> Investment Management route. Hoping not to get burned in IB.

Also, how much AUM do you manage? and how many people do you have under you, how do you manage them/what do you make them do? Sorry for lots of questions, just curious!

Best Response
Jan 18, 2014

What I mean by the comment on relevancy is that early in your career, you'll be asked to do a lot of stuff that may not seem directly connected to making an investment decision. That shouldn't dissuade you from doing that job well and then trying to move into a job where you are on a buy side team. For example, some of the analysts on my team that were doing ALM/ actuarial work seemed resigned to doing that for the rest of their lives. Some of these guys were crazy-talented and their mathematical ability would be appreciated in a number of areas on the buy or sell-side but they didn't seem to understand that their first analyst job was not a life sentence. In IB, even though I am on the buy side, I know a number of guys who started in IB and made a switch. It's not that it's easy but I guess nothing looks that easy anyways to me, so the exceptional resources and training you can get at a major IB can definitely translate. I also highly recommend getting your CFA. asset management firms really appreciate it and the investment consultants who screen us for potential mandates look for it. I'd think that would give you a lot of options when paired with an IB background. As for my firm, we have less than 40 people and an investment team of 20.AUM less than 10 billion but greater than 2 billion...don't want to get overly specific. We have credit analysts and traders that constantly work with PMs to generate trade ideas, identify risks such as some cross-sector correlations between sub sectors, or duration drift, or exposure to yield curve steepening and flattening, etc. So the analysts range from credit research to portfolio risk analysis. Credit risk such as spread vol and exposure to m&a, increasing leverage, declining business outlook are all things they monitor as well as keeping up with earnings and inconsistencies in any financial statements. Credit is as much about avoiding mistakes as it is about identifying undervalued opportunities.

    • 3
Jan 18, 2014

Great post, thank you

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Jan 18, 2014

I appreciate the insight!

Jan 18, 2014

Solid write up. Thanks

Jan 23, 2014

Interesting on the advocating of analyst positions as a starting point for fixed income PM's vs. being a trader. Granted I've only worked as a trader at two different buy-side fixed income desks (asset mgmt & fund), and in both cases the PM's all started as traders rather than credit analysts.

Good write-up!

Jan 23, 2014

Thank for the insightful write-up. How is the pay in ALM type portfolio management? When you go long corporate bonds, do you swap out the duration risk? What is your 5-year view of the fixed income Asset Management business -- in light of uptrending rates? Thanks!

Jan 23, 2014

I should note that I work in muni's, so I have no idea how the path to becoming a PM is in other credit products.

Jan 24, 2014

Great write up, i really liked how you described how it isn't so amazing to be good at everything in student terms. It kind of gives me more motivation. As a student working towards my Bachelors, i really do have to work hard to get good grades and never got things in school easily. I feel this will help me in my journey to working in the industry.

VPA

Jan 18, 2014

Coreytrevor...we have a mix of guys that started their careers as traders and analysts. I actually agree that it is very common for traders to become PMs in fixed income but it also depends on what type of analysts your talking about. I know at some other AM firms where some colleagues work that they've also had a mix but very common for a firm to have a "trader/ analyst" for a particular sector. For example Joe smith at xyz investment management covers financials but after deciding which credits he likes, he also has the ability to put the trade on. A lot of the different titles are a bit confusing because it basically all comes down to how much proprietary rope you are given by the head PM. Some guys early on are traders but are really focused just on execution whereas others gain the ability to put on active weights within a particular sector.

Jan 26, 2014

Coreytrevor, thank you very much for this post. It really resonated with me. I am in the exact same boat as you when you were an analyst. I feel like I'm always a few steps behind as compared to my peers who are in banking or who are traders. I was a consultant at one of those m/b/b firms who made the jump to a long only fixed income firm. But shortly after making the transition, I realized how little I know about the credit world and portfolio management. Right now my role requires me to be more focused on ALM, SAA, TAA, and (as opposed to looking financials which I'm well versed in) and not so much the fundamental stuff. I find it to be more quantitative and challenging...but that's just me.

As an investment analyst, I feel like I'm look more high level details of portfolio management rather than digging in into the technicals. After six months at the job, I still feel lost. I would describe my job to be somewhere in between the quants who do heavy risk and asset/liability modelling and the credit research analyst who cover specific sectors. Is there anywhere I can PM you and ask you a few questions?

Jan 23, 2014
sixrings:

Coreytrevor, thank you very much for this post. It really resonated with me. I am in the exact same boat as you when you were an analyst. I feel like I'm always a few steps behind as compared to my peers who are in banking or who are traders. I was a consultant at one of those m/b/b firms who made the jump to a long only fixed income firm. But shortly after making the transition, I realized how little I know about the credit world and portfolio management. Right now my role requires me to be more focused on ALM, SAA, TAA, and (as opposed to looking financials which I'm well versed in) and not so much the fundamental stuff. I find it to be more quantitative and challenging...but that's just me.

As an investment analyst, I feel like I'm look more high level details of portfolio management rather than digging in into the technicals. After six months at the job, I still feel lost. I would describe my job to be somewhere in between the quants who do heavy risk and asset/liability modelling and the credit research analyst who cover specific sectors. Is there anywhere I can PM you and ask you a few questions?

Hey sorry I wasn't the OP. I was just writing an addendum to my post about traders becoming PM's in my product in AM.

Jan 26, 2014

Haha, yeah I didn't read your post correctly. It was a long night. Hope you have a good one bro.

Jan 27, 2014

How is compensation on the fixed income side for young PM's? What city are you in?

Jan 29, 2014
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